Exchange rate pass-through, exchange rate volatility, and their impact on exports: Evidence from Indonesian data
Arindra A. Zainal ([email protected], [email protected]) Accepted May 2004, Department of Economics, College of Arts and Sciences, Kansas State University
This study focuses on the relationship between the exchange rate and export performance, using Indonesian data. Although many studies have been undertaken on this topic, only a few have been devoted to developing countries. Studies of exchange rate pass-through (ERPT), especially for small open economies, typically show that pass-through from the exchange rate to export prices is incomplete. The results of the studies of exchange rate volatility and export volume are ambiguous. Although most show a negative relationship between these two variables, some show a positive relationship.
Johansen's cointegration test was used to determine the long-run relationship between the variables tested. Where we could not perform the Johansen cointegration test because we had one stationary variable, the ARDL (autoregressive distributed lag) approach to cointegration testing, as proposed by Pesaran and Shin, was used. Finally, a VAR (vector autoregression) approach was used to discover the dynamic relationships among the export price, export volume, exchange rate and exchange rate volatility variables.
The study shows that most of the Indonesian export commodities tested are price taker commodities. The ERPT of groups of commodities showed no long-run equilibrium relationship (or no cointegration) for the group of labour intensive goods and the group of natural resource intensive goods. Although it was found that there was cointegration for the mining and high technology intensive groups of commodities, the ERPT coefficients for these variables were not statistically significant at the 5% level. At the commodity level the study indicated that, except for palm oil and sawn timber, the Indonesian export commodities tested had relatively weak market power: in other words, Indonesia is a price taker in the world market for most of its export commodities.
The study of exchange rate volatility indicates that export sector performance is not determined by the volatility of the exchange rate, but may be determined by other variables. According to our VAR results, the variance decomposition of the export price shows that a shock in the level of the exchange rate explains more of the variance in the export price than does a shock in exchange rate volatility. The variance decomposition of export volume shows that a shock in the exchange rate and a shock in exchange rate volatility had about the same effect on the export volume for some commodity groups.
These findings are important from a policy standpoint, because they indicate that the nominal exchange rate and exchange rate volatility are not significant variables in determining Indonesian export performance.
Culture and economic development: An empirical study of cultural environment and entrepreneurial abilities in the Indonesian province of Papua (West New Guinea)
<http://archiv.ub.uni-marburg.de/diss/z2005/0148/> Martin Müller ([email protected]) Accepted February 2005, Faculty of Business Administration and Economics, Philipps-University Marburg, Germany
This study focuses on the cultural reasons for the marginalisation of indigenous people in the modern economy of the Indonesian province of Papua. The theoretical background for the study is grounded in the development logic of Schumpeter and the development theory of Röpke, itself based on Schumpeter's logic. The empirical data were collected through questionnaires in three rural regions of Papua, the areas of the Maibrat, Kemtuk and Dani ethnic groups.
People in the three research areas rely heavily on subsistence agriculture organised within the family. Agriculture is characterised by a low degree of control of the natural environment and low productivity. The societies are particularistic (in that personal ties take precedence over commitment to society and the state) and shame-oriented.
Most of the elements of the three cultural environments discussed in the study have an inhibiting effect on entrepreneurial action and economic development. These elements include a mechanistic, indirect, ritual–manipulative relationship with God, influenced by animism; a high degree of mistrust towards non-relatives; and a very pronounced principle of egalitarianism. This latter principle forbids the accumulation of wealth for personal purposes. It is the reason for a compulsion to share, leading to an anti-surplus principle. The over-pronounced social solidarity with relatives makes the extended family an economic development trap.
Most of the entrepreneurial abilities identified in the study support entrepreneurial action, and with it economic development, only on a small scale. Concepts of the genesis of wealth and affluence that are influenced by animism clearly diminish any internal (personal) locus of control. There is a desire for harmony rather than for autonomy. There is a ‘wait-and-see’ approach to solving problems. The ability to anticipate future opportunities is limited, and innovations can rarely be implemented when they are in conflict with tradition and the habits of the older generation. People rarely embrace opportunities triggered by contact with their foreign cultural environment. Evidence from the Dani area shows that the mere existence of marketing opportunities does not automatically lead to greater market orientation. Innovations are adopted very selectively in order to ‘round out’ the home culture.
There is a tendency not to defer gratification of needs. Authoritarianism and a need for affiliation and recognition are very pronounced. A prestige economy— with prestige rather than efficiency criteria as the focus of economic activity— prevails, and this is not generally consistent with economic development.
The success motive (hope for success as part of the achievement motive) exists only on a small scale in all three of the research areas. But significant results for the Maibrat and Kemtuk areas confirm the central role that the success motive plays in economic development. Cultural elements such as polygyny hinder the development of the individual's achievement motive. Entrepreneurs enjoy little prestige and appreciation in society. These characteristics severely limit the ability of the research areas to develop economically.
Economic development triggered by Papuans themselves would require a reduction in the demands of the extended family, accompanied by far-reaching changes in culture—in short, a transformation of the society. An important role here falls to Christian ethics, which, besides effecting transformation, can help to foster cultural revitalisation. Furthermore, education involving the local languages of Papua's various ethnic groups must be established, and there needs to be culturally oriented promotion of small entrepreneurs.
An exploration of interaction effects in Indonesian regional economic development
Suahasil Nazara ([email protected]) Accepted November 2003, Department of Urban and Regional Planning, University of Illinois at Urbana-Champaign
This dissertation presents four analytical studies covering different areas of Indonesian regional economics, with special attention to interregional interaction.
The first study examines the determinants of the lay-off process that took place among districts in Java at the onset of the 1997–98 economic crisis. It shows that the lay-off rate—the ratio of lay-offs to the labour force—was negatively related to the economic growth rate and the share of labour in the informal sector, and was positively related to the unemployment rate. This study also confirms the empirical significance of spatial effects: it suggests the existence of an inter-regional spillover effect, implying some degree of district-level integration in the lay-off process.
The second study seeks the determinants of output multipliers. In demand-side analyses, a greater amount of final demand expenditure is usually prescribed to increase total production. This study offers a different perspective by asking: is it possible to find economic variables that may affect the magnitude of the multipliers? Using the 1995 Indonesian interregional input–output table and a regional data set, the study takes account of spatial effects by fitting a spatial dependence model connecting output multipliers and variables derived from exogenous accounts to the input–output framework. Three findings stand out. First, the importance of considering spatial effects in seeking the determinants of output multipliers is confirmed. Second, the study reveals the significance of the primary input structure as a determinant of the output multiplier. Third, the results confirm the importance for the regional economy of the propensity to spend locally.
The third essay proposes two explanatory, pattern-finding methodologies for hierarchically structured regions: the hierarchical Dendrinos–Sonis model, and spatial shift–share analysis. The hierarchical Dendrinos–Sonis model is used to analyse the competition–complementarity patterns of regional development, examining whether economic growth in one region has a favourable impact on that in others. The spatial shift–share extends the widely used standard shift–share decomposition. In its spatial version, it evaluates a region's growth in terms of that of its neighbour, rather than in terms of that of the nation. An Indonesian application is presented in a context of spatial growth inequality.
The fourth essay measures the degree of economic importance of Indonesian provinces by applying the extraction method within an interregional input–out-put analysis. The method hypothetically extracts a particular province, and analyses output differences between the full-region system and the hypothetical system (i.e. between the country as a whole including a given province and the country minus that province). Greater output differences correspond to greater importance of that particular province in the interregional system. Further, the study relates a region's degree of importance measured in this way to the notion of how similar any two regions are. This interregional similarity is exemplified by a set of indicators measuring the economic distance between two regions. The study finds that any two regions that have high levels of economic importance are also likely to be economically similar.
Structure, features and determinants of vertical inter-firm linkages in Indonesia
Yuri Sato ([email protected]) Accepted 2001, Faculty of Economics, University of Indonesia
This study of vertical inter-firm linkages provides an analytical foundation for assessing linkage development and helps to identify keys to future linkage evolution. It focuses on the machinery industry and analyses linkages from the stand-point of both assemblers (backward linkages) and component suppliers (forward linkages). It covers 52 firms in Jabotabek (the Greater Jakarta area) and Surabaya (urban industrial agglomerations) and Sukabumi and Ceper (rural clusters).
The study compares backward linkages in Japanese-brand motorcycle and Indonesian-brand agricultural machinery manufacture. It finds that the motor-cycle industry has a three-layer subcontracting hierarchy concentrated in Jabotabek, while a local-brand assembler of agricultural machinery has a single layer of smaller-scale subcontractors with far less urban concentration.
From the suppliers' viewpoint, four types of forward linkages are identified, classified by order provider: subcontracting linkages with assemblers (type A); contracting linkages with user-factories (type U); putting-out linkages with wholesalers (type W); and marketing linkages with retailers (type R). There are two major findings.
First, there is a spectrum ranging from linkages closer to vertical integration (types A and U) to those closer to market transactions (types W and R). Type A linkages have higher urban proximity, higher dependency on the largest customer, stricter order specifications, weaker bargaining power in price setting and higher technological commitment than type R.
Second, types A and W are mutually contrastive. In type A linkages, assemblers tend to provide stimulus to subcontractors in technology and quality control, but negligible financial support. In type W, wholesalers function as putters-out—intermediating orders, transmitting market information and reducing the suppliers' financial burdens by offering trade credit—but make a low technological commitment. While suppliers of both types are capital intensive, those of type W show higher profit ratios and labour productivity: they can off-set investment burdens with high profits, by switching main products according to market information provided by wholesalers, by effectively utilising advance payments offered by wholesalers, and by saving on investment outlays for technological upgrading.
Combining these results, we can depict a spectrum of linkage types classified by location (urban–rural), brand (foreign–local) and size (large–small). Assuming that linkage development reduces the disparities among firms involved in the linkages, this structure indicates that the linkages are still underdeveloped.
Foreign-brand subcontracting linkages and putting-out linkages may be the most dynamic. Foreign-brand subcontracting linkages show higher export ratios and technological commitment; the prime mover of such attributes is a foreign-brand assembler. Putting-out linkages have higher profit-generating capacity based on quick response to markets; the prime determinant of these attributes is the high-risk volatile nature of the market.
These two determinants are exogenous to the linkages themselves, suggesting that most firms involved in linkages are not the prime movers of linkage development. A potential endogenous determinant observed in the study is firm owners' awareness of ‘linkage effects’. If a firm owner becomes aware that ‘linkage benefits’ in terms of technology and finance exceed ‘linkage costs’, he will form more linkages. The study indicates that more experience of foreign-brand linkages and greater exposure to market competition tend to sharpen this awareness.
Inflation targeting and exchange rates in emerging economies
Amalia Adininggar Widyasanti ([email protected]) Accepted September 2005, University of Melbourne
Since its adoption by New Zealand in the early 1990s, the monetary policy regime known as ‘inflation targeting’ has been widely debated. Even though many emerging economies have implemented inflation targeting, there are still debates as to whether this is advantageous for them.
This dissertation studies the role of exchange rates and private agent expectations in emerging economies when the monetary authority undertakes an inflation targeting strategy. A macroeconomic model developed in this thesis emphasises the role of exchange rate expectations in determining the inflation of traded goods prices and the role of private agent expectations in determining the inflation of non-traded goods prices. The thesis also investigates the importance of exchange rate smoothing as a one of the central bank's objectives.
The results suggest that the degree to which private agents are forward looking has an effect on the volatility of macroeconomic variables. Under flexible inflation targeting with a commitment rule, more forward-looking private agents can increase the volatility of impulse responses. It is therefore suggested that a central bank should undertake flexible inflation targeting with a discretionary rule when private agents are strongly forward looking. The results also show that an interest rate smoothing policy can help reduce the volatility of variables in the presence of highly forward-looking private agents.
The results of model calibration to the Indonesian economy suggest that forward-looking expectations of private agents contribute more to exchange rate pass-through in this economy than backward-looking expectations do. In addition, a policy of exchange rate smoothing accompanied by interest rate smoothing is beneficial in that it reduces the volatility of the target variables. This benefit is especially large when the economy experiences a domestic supply shock.
The role of private agents' expectations in an economy with inflation targeting is studied after introduction of an exchange rate shock to the economy. The policy of exchange rate smoothing and interest rate smoothing helps to reduce the volatility of variables when private agents are more forward looking. However, when they are more backward looking, the benefits of exchange rate and interest rate smoothing policies are not significant.
Finally, this dissertation investigates the hypothesis that exchange rate and interest rate smoothing will significantly affect the economy when private agents are more forward looking. An exchange rate smoothing policy in an inflation targeting framework reduces the volatility of exchange rates in the case of more forward-looking private agents, but at the cost of higher volatility of other variables. An interest rate smoothing policy dramatically decreases the volatility of key variables other than exchange rates. Therefore, this study suggests that the optimal choice for central bank policy is to undertake both exchange rate and interest rate smoothing policies if the central bank is concerned with reducing the volatility of key variables, including exchange rates. It also argues that the impact of an exchange rate shock on the key variables' volatility is higher when private agents are more forward looking. In the case of more forward-looking private agents, the impact of an exchange rate shock can be lower if the central bank puts more weight on exchange rate and/or interest rate smoothing policy. However, the benefits of exchange rate and interest rate smoothing policy are not apparent when private agents are more backward looking.
The impact of the application of the Bank Perkreditan Rakyat system on the performance of rural financial institutions
Sumantoro Martowijoyo ([email protected]) Accepted October 2001, Post-Graduate School, Gadjah Mada University, Yogyakarta
This study analyses the impact of the 1990s banking deregulation on the performance of rural financial institutions (RFIs), and identifies key factors affecting their performance. The term ‘rural finance’ is used instead of ‘microfinance’ to emphasise the sometimes neglected need to adapt to local conditions. The objects of study are: (1) kelompok swadaya masyarakat (KSM): self-help groups including rotating savings and credit associations; (2) Badan Kredit Desa (BKD): RFIs originating in Dutch colonial times, known formerly as lumbung desa (‘paddy banks’) and bank desa (village banks); and (3) Badan Kredit Kecamatan (BKK): subdistrict-level RFIs founded by the Central Java provincial government in the early 1960s.
While the 1967 Banking Act acknowledged RFIs and allowed them to operate within the banking system, the 1992 Act perceived them as ‘weak’ and ‘small’, and required them to upgrade to Bank Perkreditan Rakyat (BPR) status. This change reflected a bias towards commercial banking practices and overlooked the role of RFIs as local economic institutions. In becoming BPRs, they had to comply with the CAMEL (capital adequacy, asset quality, management, earnings and liquidity) criteria used to assess commercial banks' performance, and to adhere to standardised reporting requirements, obligations to operate daily, and other regulations applied to commercial banks. These requirements undermined the performance of RFIs, requiring drastic changes to accounting systems, organisation, cost structure and work culture, and threatening their sustainability. The 5,345 BKDs were temporarily exempted from these requirements, which, it was estimated, would bankrupt 90% of them. The policy discouraged the broadening and deepening of outreach for all 510 BKKs, which suffered a decline in existing and new borrowers, as well as a shift in market segment towards higher income groups. It also consigned the 2,272 unlicensed RFIs to ‘illegal’ status and a bleak future.
As an alternative to the complicated BPR performance criteria, this thesis proposes a set of ‘simple-diagnostic-curative (S-D-C) criteria’ for RFIs. It argues that an RFI's performance is determined by the extent of its social relationship with its customers (hubungan sosial), which influences its ‘effective outreach’ and therefore its self-sufficiency. Hubungan sosial is measured by scoring the personal relationships of a sample of customers to key personnel of RFIs—commonly four officials; a personal acquaintance with all of them for at least two years is scored as 1.00 (100%). ‘Effective outreach’ is represented by: (1) savers as a percentage of total households in the institution's operating area; (2) borrowers as a percentage of total households; and (3) defaulters as a percentage of total borrowers. ‘Self-sufficiency’ consists of: (4) efficiency: operational costs per rupiah lent; (5) funding self-sufficiency: the ratio of deposits to loans; (6) operational self-sufficiency: margin (the excess of interest income over operational costs) per rupiah lent; and (7) profitability: net profit-before-taxes per rupiah lent. Using a simple rank-tabular comparison of the performance factors of the observed RFIs and Spearman rank correlation analysis, the hypothesis that the S-D-C criteria will correctly identify viable RFIs is successfully tested. The study suggests that this set of criteria should replace the CAMEL criteria for RFIs, especially those founded before the 1988 deregulation package (the ‘old’ BPRs).